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On-ground check: Is India Inc ready for GST?

With barely a few hours to go before goods and services (GST) tax bill becomes a reality, channel / onground checks by two leading research houses – Bank of America Merrill Lynch (BofA-ML) and Edelweiss – suggest that India Inc, at least the small and medium enterprises, are not fully prepared for the transition. Both, however, agree that beyond the short-term pain, there are gains in store over the long run. In the new regime, major Central and State taxes will get subsumed into GST, which will reduce the multiplicity of taxes.

“Our interactions with dealers, manufacturers and GST facilitators suggest that the SME segment is not only struggling for preparedness, but also staring at rising manpower and compliance costs which could disrupt their business and impact cash flows,” says a June 27 report by Edelweiss titled GST: Get, Set, Go.

In the run-up towards last leg of GST implementation, Edelweiss' interactions with companies and trade channels suggested four key points: a) there was significant slowdown in past two weeks of June across several sectors; b) inventory liquidation was wider-than-expected and could last beyond Q1FY18; c) most participants suggested normalisation only from Q3FY18; and d) FMCG, auto ancillaries after-market sales, pharmaceuticals, plywood and tiles sectors were most impacted, while auto OEMs and cement seem to be least impacted. However, the brokerage argues that the GST will usher in a much simplified tax structure in the country, bring in cost efficiencies and result in market share shift from unorganised to organised players.

In this backdrop, it remains structurally positive on sectors like building materials, plastics, electrical equipment, logistics, luggage, automobile and FMCG (including tobacco and jewellery). On the other hand, analysts at BofA-ML, in their June 28 report titled GST tracker: Retail impact? Nobody seems to know also indicate the lack of preparedness. “We spoke with managers and store keepers of several retail outlets in Mumbai – none seem to have any idea of how the GST will impact their businesses or product prices. Most are still waiting to be guided by ‘senior / company management’; many are using the GST to urge consumers to buy ahead of the change. This indicates corporates still need time to: a) understand the GST themselves, and b) then communicate the impact / change to end chain of staff,” writes Sanjay Mookim, India equity strategist at Bank of America Merrill Lynch in a coauthored report with Nafeesa Gupta.

Mookim also suggests that the impact of GST on listed company volumes and earnings may extend beyond the June quarter. That apart, BofA-ML also believes that this lack of preparedness will impose costs – money and time. However, these will be temporary, it feels, as most businesses will learn the new tax filing system. “A combination of: a) seasonal pick-up in sales (festive season in October); b) restocking post GST; c) better consumer appetite (monsoon, farm loan waivers); and d) the base of the demonetisation quarter means companies can report strong year-on-year (y-o-y) growth numbers in the December quarter,” BofA-ML says.

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